Determinants of capital structure: Theory vs. practice

Most of the listed companies in Finland seek to maintain a target capital structure in order to maximize firm value, by minimizing the costs of prevailing market inperfections. However, the existence of asymmetric information, as well as corporate control aspects, induce some managers to follow a pecking order strategy in raising new funds. An important motive for following a pecking order strategy, instead of a target capital strategy, is to avoid control dilution. Smaller firms are found to be more likely to preserve the ownership structure of the firm. Thus we find further evidence that the corporate control aspect explains part of the capital structure puzzle. Furthermore tax motives, and other macroeconomic indications are not found to be considered as important as project and firm specific factors, when a firm is considering how to finance a new investment.